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Collateral Requirements for an SBA 504 Loan

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If you are considering financing for fixed assets for your small business, the SBA 504 can be a great option. Eligibility requirements are not dissimilar from conventional loans, including good credit, proof of income, and collateral to secure the loan. The type of collateral differs from conventional loans, however, and depends largely upon what is being financed. Let’s take a closer look at collateral requirements for a 504 loan, and the types of business ventures that may have additional requirements.

General Collateral Needed for 504 Loans

Collateral serves as security for lenders in case a borrower defaults on their loan. SBA loans are unique in that they are considered “fully collateralized.” This means that, in general, the assets being financed by the loan also secure the loan. For example, if a 504 loan is being used to purchase a building, that financed property will act as collateral should the borrower default on payment. Of course, the exact loan terms and collateral required will vary depending on the asset being acquired and the loan amount.

Keep in mind, also, that these collateral requirements are for the 40% of the loan supplied by the SBA. The first 50 percent of the loan will be supplied by a bank or other conventional lender, which will likely require some sort of collateral or a personal guarantee. Again, these requirements will vary depending on the lender and nature of the loan. 

Special-Purpose Properties and the 504 Loan

Special-purpose properties are those that are designed for a specific, often unique, use. These properties are generally not easily adaptable to alternative uses, making them riskier from a lender’s perspective. Because of this, the SBA and participating lenders often require extra collateral when financing special-purpose properties. If you wish to finance a special use property, you will typically need to supply an additional 5% in equity or down payment (15% instead of 10%)

Why is extra collateral required for special-purpose properties?

  1. Limited Marketability: Special-purpose properties often have limited marketability compared to general-purpose commercial properties. This means that if the borrower defaults on the loan, it may be more challenging for the lender to sell the property and recoup their losses.
  1. Dependent on the Business: Many special-purpose properties are closely tied to the success of the business operating within them. If the business fails, the value of the property may decline significantly. This makes lenders cautious and more likely to seek additional collateral.

What Counts as a Special-Use Property?

The SBA has a complete list of what it considers “special use properties.” The following are some examples of ventures that would require a 15% down payment as opposed to 10%.

  • Restaurants
  • Movie Theaters
  • Gas Stations
  • Schools
  • Hospitals
  • Amusement parks
  • Cemeteries
  • Bowling alleys
  • Golf courses
  • Nursing homes

All of these businesses have specialized layouts and equipment that would require significant effort to repurpose as a different business. 

504 Loans in Colorado

Collateral requirements for SBA 504 loans are an important consideration for small business owners seeking financing for their expansion plans. When dealing with special-purpose properties, borrowers should be prepared for the possibility of extra collateral requirements due to the unique and less flexible nature of these properties. Understanding these requirements and working closely with experienced SBA lenders can help small businesses navigate the loan application process successfully and secure the funding they need to thrive.

In Colorado, CEDCO helps small business owners across the state with a wide variety of projects. From breaking ground on a new building to expanding an existing one, we can help you get the maximum benefit from your 504 loan. Call or go online today to schedule a free consultation. 

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